Assignment Problem:
If given:
a) Target Company's Share Trading in the market
b) Acquirer company willing to pay ..... per share
c) Target Company's basic share outstanding
d) Convertible rate
e) Long-term debt due time
f) Principle amount
g) Stock options outstanding
h) Stock options exercise
How can you find out Fully Diluted Shares Outstanding?
Problem 1:
i) Describe/define the target company's "clean price" in an announced merger.
ii) How does the clean price change over time if the deal continues on for a very long time, but has still not yet completed or closed? What tools can you use to track movements in the clean price over time?
Problem 2:
Calculate the "fully diluted shares outstanding" for the following potential target company. The target company's shares are trading in the market at $8.00. The potential acquirer has modelled that they are willing to pay $12.00 per share in an acquisition. The target company has basic shares outstanding of 100 million. The target company has employee share options outstanding, as outlined in Figure 1.
The target also has convertible bonds, with the following note in its most recent financial statements: "the Company has outstanding $200 million of 5.25% convertible notes which are included in long-term debt due within 1 year, on the company's consolidated balance sheet. The notes are payable in cash at maturity unless holders exercise their option to convert the notes into shares of common stock. The initial conversion rate, provided under the terms of the notes, is 85.4908 shares of common stock per $1,000 principal amount of notes."
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Stock Options Outstanding
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Stock Options Exercisable
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Options Tranches 1
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Number Outstanding
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Weighted Average
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Number Outstanding
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Weighted Average
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2
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in millions
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Exercise Price/Share
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in millions
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Exercise Price/Share
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3
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8
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8.5
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2
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8.6
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4
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12
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9.2
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4
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9.1
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5
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9
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11.4
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7
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11.9
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6
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87
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13.1
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71
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12.4
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7
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43
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16.4
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36
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16.55
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8
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23
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18.9
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15
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18.61
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16
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20.2
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14
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20.6
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68
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25.7
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47
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25.4
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266
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196
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Problem 3:
Discuss the risks a merger arbitrage trader would need to consider when contemplating investing in an announced acquisition.
Problem 4:
i) Suppose that a high P/E ratio company undertakes acquisitions frequently, and usually buying companies with lower P/E ratios than itself. What should happen over the medium to long term to the P/E ratio of this serially acquisitive company? Is this type of serial-acquisition strategy value-destructive or not? Discuss.
ii) What does it mean for an acquiror to undertake a "dilutive transaction" and why do acquiring companies avoid undertaking dilutive purchases?
Problem 5:
Suppose you are a merger arbitrage trader, your desk has imposed a dollar return minimum such that you cannot invest in a deal unless you can potentially earn $200,000 per deal (assume no expectation of a higher counter-offer arising prior to the deal closure).
i) If there is 2.7% left in the spread if you invest in the deal today, what investment size (position size in dollars) must you put on at minimum to achieve this minimum per deal dollar return?
ii) For this same deal, suppose the desk's risk limits also include that you cannot invest more than 1 day's volume in the target stock (based on average daily volumes prior to the deal announcement). The stock trades at $25/share. Prior volumes per day averaged approximately 150,000 shares trading per day. Can you invest in this deal at your minimum size and stay within your risk limits? Discuss.
iii) Why is this liquidity limit imposed? Discuss.
Problem 6:
i) Suppose an M&A adviser believes that any premium over current market pricing paid for a particular target would be overpriced. Is there a scenario where a target company that appears overvalued might still be worth purchasing? Discuss.
ii) Briefly discuss the market circumstances where an acquiring company is likely to prefer to finance a proposed acquisition entirely share-for-share instead of all cash.
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